Why Security Token Offerings (STOs) Will Replace ICOs

In June 2018, the SEC declared that most ICO projects were similar to securities and they will be subject to SEC regulations. Enter Security Token Offerings (STOs).

The crypto markets had a strong, even if a mixed reaction to the decision.

Many investors and crypto developers welcomed the change because crypto projects gain instant credibility when approved by the SEC.

However, many new and existing platform developers were concerned that they would be subject to strict SEC guidelines.

It might be easier for them to just abandon a project altogether.

Problems With New And Existing Projects

ICOs were considered an simple way to raise finances through crowdfunding. Developers did not need to have advanced financial and legal knowledge. They could create platforms offering tokens for specific causes.

Many new tokens were created on platforms such as Ethereum or Stellar and could be freely traded by investors. The new SEC rulings will most certainly change that.

It is illegal to buy and sell securities if they have not passed “Know Your Customer” (KYC) and Anti-Money Laundering checks.

FinTech companies who raised millions of dollars through ICOs could soon find the SEC stepping in to stop operations.

The government will also fine new and existing companies who do not adhere to SEC rules and regulations.

Most platforms have not addressed problems related to regulatory requirements. That said, new companies have developed Security Token Offerings (STOs) protocols that are expected to solve SEC issues.

Security Token Offerings

Security Token Offerings (STOs) are a type of ICO that is designed to reduce uncertainty around future regulations.

With Utility Tokens, the investor owns nothing because there are no real-world assets involved. By using Security Token Offerings, the buyer will own equity which the security token represents.

A Security Token is very similar to normal securities traded such as stock shares, derivates and bonds. In this case the security is simply represented in a digital form.

Existing STO Platforms

A few STO platforms have been launched which allow developers to integrate know-your-customer and anti-money laundering checks into their protocols. These include Polymath and Harbor among others.

Both platforms automate regulatory checks that are usually slow, complex and expensive to complete for developers.

Listing exchanges are also starting to take action to become more compliant with the SEC. Exchanges like T-Zero and Open Finance are working closely with STO platforms to change their operations.

T-Zero is very popular and has a significant number of backers supporting it. The exchange from Overstock is counting on STOs which suggests that there is an extremely good chance they have it right.

Future Of STOs

Under the STO protocols, legal crowdfunding might be possible once again. This would make it easy for new projects to raise finances. Investors would also have the ability to buy securities that are easily traded and legally compliant.

The system appears to be the future. STOs are not a fully functional reality quite yet. Projects like Polymath, Harbor and T-Zero are still in development. Open Finance is working to ensure that these protocols offer legal trading.

The SEC has shown a willingness to work with ICOs when they adjust operations to comply rules.

The SEC appointed crypto chief Valerie Szcezepanik recently noted that “ICOs are a comparatively cheap and frictionless way to raise a lot of money with a liquid secondary market.”

The authorities are hinting that they don’t want to ban the market but merely steer it toward more effective regulatory control.

While the SEC position is softening, STOs are building momentum. A $400 million real estate STO was announced several months ago as an example.

Experts believe that the STO market will experience a similar boom that we witnessed with ICOs.

New projects are offering incentivized dividends per share and building revenue streams for investors through Proof of Staking.

This will ensure that the STO market will become more trustworthy and expand significantly.